Bob and his wife Jane have one child, Jimmy. Jane passed away last year. Bob has worked hard and earned an honest living. Although not wealthy, he has made a good life for his family and is proud of his accomplishments. He wants to pass his hard earned legacy on to his son. However, despite Bob's hard work, he and Jane failed to create a Trust, and when Bob died, (in year 2003) most of his hard earned legacy went to the United States Government.

Bob's Estate was comprised of the following items:

House: Purchased for $350,000.00 Still owes $200,000.00 Today's Value = $500,000.00

Stock: Purchased Microsoft stock for $20,000.00 Today's Value = $ 75,000.00

Mutual Funds/CD/IRA/401K Today's Value = $475,000.00

Life Insurance Policy Value = $250,000.00

Cash $ 20,000.00

GROSS VALUE OF ESTATE: $1,320,000.00

At Bob's death, Jimmy immediately received the $250,000.00 life insurance policy left by his father, a thoughtful and resourceful investment by Bob. Jimmy figures to use that money to help pay for estate taxes. Because Bob died without a Trust, his estate must go through Probate Court. This, as Jimmy just found out, is a lengthy and costly process. A probate proceeding typically takes between 18 and 25 months. It is also expensive. Jimmy just found out that probate fees for Bob's estate will cost him $198,000.00. This is quite a shock to Jimmy, but he uses the life insurance proceeds his father left for him to cover probate costs. Jimmy is now left with $52,000.00 from the life insurance money.

It's been 20 months, almost 2 full years since Bob passed away, and Probate is finally complete. Jimmy now receives a brutal lesson in estate taxes. He owes estate taxes of $176,000.00. Jimmy applies the remaining $52,000.00 from the life insurance, but shockingly still owes $124,000.00 in estate taxes. Like most people, Jimmy does not have $124,000.00 laying around so he decides to sell Bob's Microsoft stock to lower the estate tax debt. Jimmy now receives another brutal lesson, this one in capital gains taxes. Because Bob did not have a Trust, Jimmy must pay capital gains taxes on the appreciation of the Microsoft stock. Bob purchased the stock for $20,000.00. However, it is now worth $75,000.00, a gain of $55,000.00. Jimmy must pay $15,400.00 in capital gains taxes, meaning Bob's $75,000.00 Microsoft stock is only worth $59,600.00 to Jimmy. Jimmy applies that to the outstanding estate taxes owed, lowering his estate taxes to only $64,400.00.

Jimmy has no option but to sell his father's home. Bob took great pride in his home, and Jimmy had no problem getting the full value of the house, which is $500,000.00. Bob still owed $200,000.00 on his mortgage, leaving Jimmy with $300,000.00 from the sale of Bob's home. But for one thing. Jimmy rediscovers the pains of capital gains taxes. After selling the house, Jimmy owes $42,000.00 in capital gains taxes, because the house appreciated by $150,000.00 over what Bob paid for the house. So, after the capital gains taxes, Jimmy is left with $258,000.00 from the sale of his father's house. Jimmy uses this money to pay the $64,400.00 left in outstanding estate taxes. After paying the remaining estate taxes, Jimmy is left with $193,600.00 from the sale of his fathers home.

So, from Bob's hard earned $1,320,000.00 estate, and after 20 months of Probate, Jimmy finally gets to reap the rewards from his father's life's work. Jimmy gets $193,600.00 from the sale of Bob's home, $475,000.00 from his dad's mutual funds/CD/IRA/401K, and $20,000.00 from dad's checking account. The $75,000.00 Microsoft stock is gone. The $250,000.00 life insurance is gone.

Jimmy is left with $688,600.00....................United States Government took $431,400.00.

Jimmy is devastated to see his dad's hard earned legacy decimated by taxes. Bob never would have let that happen, if he only knew how important it was to have an Estate Plan with a Living Trust.

...................AND THAT SAME SCENARIO WITH A LIVING TRUST...........

Jimmy does not have to go through probate, saving him $198,000.00.

Jimmy receives a step up in basis on Bob's Microsoft stock and home, meaning he would pay no capital gains tax, saving him $57,400.00. (If Jimmy did not sell the stock or home, and they increased in value, he would be subject to capital gains taxes, but only on the appreciation in value above $75,000.00 for the stock and $500,000.00 for the house).

If Jimmy's parents had done an A/B Trust, Jimmy's parents would have been entitled to pass $2,000,000.00 in estate assets before any assessment of estate taxes. This would have resulted in Jimmy paying NO ESTATE TAXES, saving $176,000.00.

Jimmy is left with $1,120,000.00 (1,320,000.00 - 200,000.00 mortgage)...............U.S. Government took $ 0

In conclusion, Jimmy would have received Bob's entire estate free of estate taxes, capital gains taxes, and probate fees. Additionally, Jimmy receives a step-up in basis in the Microsoft stock and the home, meaning both assets are treated as if Jimmy purchased them for $75,000.00 and $500,000.00 respectively.

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